Treasuries fall as U.S. employment data sustain Fed speculation

Treasuries have lost 1% in 2013, according to Bank of America Merrill Lynch indexes, amid speculation the Fed will slow the pace of its asset purchases.

The U.S. central bank is buying $85 billion of government and mortgage-backed securities each month to hold down borrowing costs and encourage economic growth.

It has kept its benchmark interest-rate target for overnight lending between banks in a range of zero to 0.25% since 2008 to support the economy. Fed Chairman Ben S. Bernanke has said he’ll keep the rate at virtually zero until unemployment falls to 6.5% while inflation is projected at no more than 2.5%.

The consumer price index increased 1.1% in April from a year earlier, the Labor Department reported on May 16.

“If we see continued improvement, and we have confidence that is going to be sustained, we could in the next few meetings take a step down in our pace of purchases,” Bernanke told the Joint Economic Committee of Congress on May 22. He also said tightening policy too soon would endanger the recovery.

Purchase Bets

The Fed will pare its asset purchases to $65 billion a month at the Oct. 29-30 meeting of the Federal Open Market Committee, according to the median estimate in the survey of 59 economists this week. In a similar survey before the Fed’s April 30-May 1 meeting, economists expected the Fed to cut purchases to $50 billion in the fourth quarter.

The U.S. economy expanded at a “modest to moderate” pace in 11 of 12 Federal Reserve districts, with broad-based gains ranging from business services to construction and manufacturing, the central bank said on June 5 in its Beige Book business survey.

Policy makers will consider the report at their June 18-19 meeting as they continue a debate on when to start curtailing the pace of bond purchases.

The Treasury 10-year yield will end the year at 2.2%, according to the median forecast of 77 economists and strategists in a Bloomberg News survey. That would be the highest year-end yield since 2010, when it was 3.29%. The yield was 1.76% at the end of last year and 1.88% at the close of 2011.